Syria crisis looms over markets

Indian shares are likely to remain volatile in the week ahead as uncertainty heightens on whether the US would mount military strikes on Syria. According to analysts, investor undertone has improved after the new Reserve Bank of India (RBI) governor Raghuram Rajan unveiled a slew of measures that has resulted in the rupee firming up.

Foreign institutional investor (FII) purchases in the last two trading days have also lifted sentiment, but a section of the market worry stocks may be overbought (overvalued) in the near term. Investors will keep a watch on domestic July industrial production and August inflation readings later this week.

The US senate this week will debate and decide whether to authorise an attack on Syria. Investors worry a war would drive up oil prices, which will revive concerns about the current account deficit and its impact on the rupee.

“Any prolonged conflict involving US personnel on the ground could send oil prices soaring. Crude prices remaining above $110 per barrel is a concern for the government,” said Sachidanand Shukla, economist with Axis Capital. “From here on, what the government does with diesel prices will be important in lieu of what is happening in Syria,” he added.

Investors and traders will initiate positions betting on the outcome of the coming US Federal Open Market Committee (FOMC) meeting, which is likely to take a call on the extent of rollback of its monetary stimulus programme, known as third round of quantitative easing (QE3). Some are hoping that the Fed may keep the QE3 tapering to the minimum after US non-farm payrolls data on Friday was lower-than-expected.“While the rupee is clearly in the oversold zone, real appreciation will only be seen post the US Fed meeting and the RBI policy review next week,” said Varun Goel, head of portfolio management services at Karvy Stock Broking.

Markets are expected to see muted reaction to the July industrial production data, to be released on Thursday. However, August core inflation data, which will also be released on the same day, is expected to be weaker.

“Lower IIP (index of industrial production) data has already been discounted by the market. But if the inflation numbers are higher-than-expected, then markets could take it in a bad way as any hope of a rate-cut in RBI’s next policy review would go out of the window,” said Yogesh Nagaonkar, head of institutional equity at Bonanza Portfolio.

The NSE Nifty, for the week going ahead, is expected to touch levels of 5,900, before it starts reversing. “On the upside, the Nifty could touch a minimum level of 5,750. It could even go up to 5,900-levels. On the downside, the Nifty has a strong support at 5,500 levels. A weekly close below this level will result in a change of trend,” said Shardul V Kulkarni, senior technical analyst at Angel Broking.

Last week, equity markets had a good run with the broader market indices, Sensex and Nifty, moving up 3.5% in the highest weekly gains seen in two months. Markets witnessed a relief rally as the rupee recovered on the back of measures initiated by the newly appointed Reserve Bank of India (RBI) governor, Raghuram Rajan.

The pullback rally was led by beaten-down sectors like banking and capital goods with investors making good of the temporary rise in prices. Sector analysts said that the rally in the banking stocks is likely to continue in the week ahead and would move up by as much 6%.